NAM: Monday Economic Report
In the fourth quarter NAM Manufacturers’ Outlook Survey, 88.7 percent of respondents felt either somewhat or very positive about their own company’s outlook, down from 92.5 percent in the third quarter. While that represents the second straight easing in confidence from the all-time high reading in the second quarter (95.1 percent), the headline index averaged 92.4 percent in 2018, the highest level in the survey’s 20-year history, surpassing the 2017 average of 91.8 percent.
Manufacturers continue to cite the inability to find talent, especially in a tight labor market, as their top concern for the fifth consecutive survey. Other major concerns included increased raw material costs, trade uncertainties, rising health care and insurance costs, and transportation and logistics costs.
New durable goods orders bounced back, up 0.8 percent in November after dropping by 4.3 percent in October. Excluding transportation, though, new durable goods orders declined by 0.3 percent in November and core capital goods spending—a proxy for capital spending in the economy—was off by 0.6 percent. More encouragingly, new durable goods orders have risen by a healthy 5.3 percent over the past 12 months, or 4.9 percent year-over-year with transportation excluded.
Manufacturing surveys from the Kansas City, New York and PhiladelphiaFederal Reserve Banks also show some softening in activity in December, with each slowing to growth rates not seen in at least a year and a half. With that said, each of these district reports continuing growth and a strong outlook, with hiring remaining solid and input costs continuing to increase briskly.
With that in mind, the Federal Open Market Committee (FOMC) voted to hike short-term interest rates at the conclusion of its December 18–19 meeting, as expected. While some analysts and politicians were calling for a pause in monetary actions in light of softer economic data, the Federal Reserve continued to see strong economic growth, especially in consumer spending and labor markets, necessitating the move.
New Federal Reserve economic projections suggest that FOMC participants predict slower growth in 2019. Those officials appear to predict two rate hikes in 2019 and one increase in 2020. This would seem to indicate one less hike in each year than seen in the September projections—hence, a somewhat more “dovish” stance. Yet, financial markets were hoping for even fewer hikes.
Housing starts rose 3.2 percent in November, largely on a sizable gain in multifamily activity, which can be highly volatile from month to month. On a more disappointing note, single-family housing starts fell to an 18-month low. Affordability and workforce issues continue to challenge residential construction, with home builder optimism also falling to its lowest level in more than two years in November.
Personal spending increased by 0.4 percent in November, slowing somewhat from the very robust 0.8 percent gain in October. Overall, American consumers have continued to spend strongly—an important signal for the economy at the all-important holiday season. In fact, personal spending has risen 4.7 percent over the past 12 months. The saving rate registered 6.0 percent in November, its lowest point since March 2013 and another indication that spending has accelerated strongly in recent months.
P.S.: Due to the holidays, the Monday Economic Report will not be published on December 31. The next issue will be released on Monday, January 7.
Conference Board Leading Indicators: The Leading Economic Index (LEI) rebounded, up by 0.2 percent in November after falling by 0.3 percent in October. This report was consistent with very modest growth in the U.S. economic outlook, with the LEI up 2.2 percent over the past six months. New orders for manufactured goods were bright spots in November, with building permits, consumer confidence, the interest rate spread and overall lending conditions also making positive contributions to the LEI. Meanwhile, the Coincident Economic Index also increased by 0.2 percent in November, with all subcomponents helping to boost that measure, including industrial production.
Durable Goods Orders and Shipments: New durable goods orders bounced back, up 0.8 percent in November after dropping by 4.3 percent in October. With that said, much of the volatility between those months came from aircraft orders, which can often be highly volatile from month to month. Excluding transportation, new durable goods orders declined by 0.3 percent in November—a disappointing reading. In addition, new orders for core capital goods (or nondefense capital goods excluding aircraft)—a proxy for capital spending in the U.S. economy—were off 0.6 percent in November. Core capital goods spending has drifted lower since reaching an all-time high in July ($69.9 billion). This suggests some softness in capital spending in the economy.
Nonetheless, the longer-term trend remains positive, even with data that have been weaker than desired in the past few months. New orders for durable goods have risen by a healthy 5.3 percent over the past 12 months or 4.9 percent year-over-year with transportation excluded. Core capital goods orders increased 6.5 percent year-over-year. Meanwhile, shipments of durable goods rose 0.7 percent in November but were unchanged with transportation excluded. Since November 2017, durable goods shipments have risen a solid 6.2 percent, or 4.6 percent with transportation excluded.
Existing Home Sales: The National Association of Realtors (NAR) reported that existing home sales rebounded for the second straight month, up from an annualized 5.22 million units in October to 5.32 million units in November. The only region with decreasing sales in November was the West. Despite the higher monthly data, existing home sales remain well below the 5.60 million units in March, reflecting ongoing challenges in the housing market. Sales have fallen 7.0 percent over the past 12 months, with declines in every region of the country except for the Northeast (which was flat). Inventories of homes for sale remain dropped from 4.3 months of supply on the market in October to 3.9 months in November. The median sales price for existing homes rose 4.2 percent year-over-year in November to $257,700.
FOMC Monetary Policy Statement: As expected (but not without some last-minute second-guessing), the FOMC increased the federal funds target range by 25 basis points after its December 18–19 meeting, with the new goal being from 2.25 to 2.50 percent. The Federal Reserve continues to see strong economic growth, especially in consumer spending and labor markets, necessitating the action, according to the FOMC. Pricing pressures also appear to be under control, with core inflation below the Fed’s stated target. With that said, nonresidential fixed investment has slowed. Future rate increases will hinge on incoming data, with FOMC participants monitoring “global economic and financial developments.”
The FOMC also released new economic projections, and these data indicate some slowing in the outlook. Real GDP is seen growing at 3.0 percent and 2.3 percent in 2018 and 2019, respectively, down from 3.1 percent and 2.5 percent at the September meeting. Despite some easing in real GDP growth estimates, the unemployment rate was seen falling from 3.7 percent now to 3.5 percent in 2019. Core inflation was predicted to remain at or near the Fed’s stated target of 2 percent. With those data in mind, FOMC participants appear to predict two rate hikes in 2019 and one increase in 2020. This would seem to indicate one less hike in each year than seen in the September projections—hence, a somewhat more “dovish” stance.
Gross Domestic Product (Second Revision): The U.S. economy grew by an annualized 3.4 percent in the third quarter, down slightly from prior estimates of 3.5 percent growth. The downward revision mainly reflected slower growth in consumer spending and exports than previously thought. Overall, though, the overarching trends were the same. Consumer and government purchases, along with robust spending on inventories, helped to buoy economic growth for the quarter, with notable drags from net exports and the housing market. Moving forward, the forecast for fourth quarter growth is 2.6 percent. Real GDP should grow 2.9 percent in 2018, which would be the strongest growth rate since 2005, and growth in 2019 is predicted to be 2.5 percent.
Housing Starts and Permits: The new residential construction data for November provided mixed news. On the positive side, housing starts rose 3.2 percent from 1,217,000 units at the annual rate in October to 1,256,000 units in November, largely from a sizable gain in multifamily activity (up from 353,000 to 432,000), which can be highly volatile from month to month. On a more disappointing note, single-family housing starts (down from 864,000 to 824,000) dropped to an 18-month low. This is consistent with other data showing softness in the housing market, largely due to affordability (e.g., higher mortgage rates, increased raw material costs) and workforce issues. On a year-over-year basis, housing starts fell 3.6 percent.
Housing permits—a proxy of future activity—was also higher for the month, up from an annualized 1,265,000 units in October to 1,328,000 units in November, its best reading since April. Yet, the bulk of that increase came from multifamily activity (up from 418,000 to 480,000), with single-family permitting essentially unchanged (up from 847,000 to 848,000). Over the past 12 months, housing permits have inched up 0.4 percent, but with single-family activity off by 1.9 percent year-over-year.
Kansas City Fed Manufacturing Survey: Manufacturing activity eased in the latest survey, growing at its slowest pace since November 2016. The composite index dropped from 15 in October to 3 in November. Respondents noted declining production, shipments and exports for the month, but new orders and employment remained positive. Meanwhile, manufacturers remained upbeat about activity over the next six months. While many of the key measures decelerated in their rates of expansion in the outlook, employment was seen picking up once more, consistent with the tight labor market nationally. Indeed, 48 percent of firms in the region see hiring and capital spending accelerating over the coming months, which is encouraging. On the downside, raw material prices were seen continuing to rise at highly elevated levels.
NAHB Housing Market Index: The National Association of Home Builders reported that confidence fell to the lowest level in more than two years in November. The Housing Market Index dropped from 68 in October to 60 in November. This continued to suggest strong growth, with the headline index at 60 or greater for 27 straight months, but that optimism dropped largely on weaker demand, with affordability and workforce challenges often cited as the biggest concerns. Yet, it is important to note that builders remained upbeat about single-family sales over the next six months, albeit with that measure declining from 75 to 65 in the latest report.
NAM Manufacturers’ Outlook Survey: In the fourth quarter survey, 88.7 percent of respondents felt either somewhat or very positive about their own company’s outlook, down from 92.5 percent in the third quarter. While that represents the second straight easing in confidence from the all-time high reading in the second quarter (95.1 percent), the headline index averaged 92.4 percent in 2018, the highest level in the survey’s 20-year history, surpassing the 2017 average of 91.8 percent. Manufacturers continue to cite the inability to find talent, especially in a tight labor market, as their top concern for the fifth consecutive survey. Other major concerns in the included increased raw material costs, trade uncertainties, rising health care and insurance costs, and transportation and logistics costs.
As seen in previous surveys, those companies that are more optimistic about exports tended to be the most upbeat in their overall company outlook. Along those lines, of those manufacturers who are positive about their own company’s export growth over the next 12 months, 82.7 percent reported that passage of the United States–Mexico–Canada Agreement (USMCA) is important. Meanwhile, nearly three-quarters of respondents felt that the nation’s infrastructure was not sufficient to meet their competitive needs moving forward, with that figure rising to 83 percent among large manufacturers.
New York Fed Manufacturing Survey: Manufacturing activity grew at its slowest pace of growth since May 2017, or in 19 months, with the headline index up from 23.3 in November to 10.9 in December. New orders, shipments and the average workweek each softened for the month, albeit at still-decent rates of expansion. At the same time, the labor market remained tight, with the employment index up from 14.1 to 26.1, the highest level since the survey began in 2001. More importantly, manufacturers in the Empire State Manufacturing Survey remain upbeat in the outlook for growth as they prepare to move into 2019. On the downside, raw material costs continued to be highly elevated even with some easing, as roughly 55 percent of respondents expect higher input prices over the next six months.
Personal Consumption Expenditures (PCE) Deflator: The PCE deflator—the Federal Reserve’s preferred inflation measure—edged up 0.1 percent in November. Reduced energy costs, down 0.5 percent for the month, helped to alleviate some pricing pressures for the month. At the same time, core inflation, which excludes food and energy, also rose by 0.1 percent in November. On a year-over-year basis, the PCE deflator has risen 1.8 percent over the past 12 months, its lowest rate since January and down from 2.3 percent in July. Excluding food and energy, core PCE inflation inched up from 1.8 percent year-over-year in October to 1.9 percent in November. The bottom line, though, is that core inflation continued to be below the Federal Reserve’s stated target of 2 percent year-over-year growth, and these data have indicated some moderation over the past few months. This helps to take some pressure off the FOMC.
Personal Income and Spending: Personal spending increased by 0.4 percent in November, slowing somewhat from the very robust 0.8 percent gain in October. Overall, American consumers have continued to spend strongly—an important signal for the economy at the all-important holiday season. Spending for durable and nondurable goods rose 0.9 percent and 0.2 percent, respectively, in November. More importantly, personal spending has risen a 4.7 percent over the past 12 months. The saving rate registered 6.0 percent in November, its lowest point since March 2013 and another indication that spending has accelerated strongly in recent months.
Meanwhile, personal income rose by 0.2 percent in November, with 4.2 percent year-over-year growth. Manufacturing wages and salaries inched up from $874.4 billion in October to $876.1 billion in November, up 2.3 percent from $856.0 billion one year ago.
Philadelphia Fed Manufacturing Survey: Manufacturing activity expanded at its weakest rate since August 2016 in the district’s latest release, with the composite index of general business conditions easing from 12.9 in November to 9.4 in December. With that said, the underlying data were mixed. Shipments and the average workweek slowed, but new orders and hiring both strengthened somewhat in the December survey. Moving forward, manufacturers in the Philadelphia Federal Reserve Bank region remain optimistic about the next six months, even with a slight pullback in sentiment in many of the data points. The labor market was seen staying quite tight and, perhaps more of a concern, raw material prices are expected to remain elevated. In a special question, respondents anticipate 3.2 percent growth in input costs on average in 2019, with wages up 2.8 percent for firms in the district.
State Employment Report: Texas created the most net new manufacturing jobs in November, adding 9,100 workers. Indiana (up 3,100), Washington (up 2,900), Missouri (up 1,900), California (up 1,400) and Ohio (up 1,400) also topped the list of manufacturing employment gains in October. In addition, Texas also saw the greatest job gains in the sector over the past 12 months, with manufacturing employment in the state up 36,000 since November 2017. Other states with the fastest manufacturing job growth year-over-year included Wisconsin (up 19,000), Washington (up 12,400), Florida (up 11,600) and Ohio (up 10,600). Meanwhile, Hawaii and Iowa had the lowest unemployment rates in the nation in November at 2.4 percent.
University of Michigan Consumer Sentiment: The Index of Consumer Sentiment increased from 97.5 in November to 98.3 in December. This represented an improvement from unchanged reading seen in preliminary figures. Americans’ assessments of economic conditions have slipped somewhat over the past few months, with the expectations component dropping in the latest survey. On the other hand, consumers feel more upbeat in December about the current economy, especially regarding the strength of the labor market. Even as the public’s perceptions about the economy have eased since March’s reading (101.4), which was the highest since January 2004, the data remain upbeat overall.